Question

What does it mean when they say that there are sovereign crises in the Eurozone?

Answer 1

The European sovereign debt crisis was a time when financial institutions, high government debt, and rapidly rising spreads of bond yields in government securities collapsed in several European countries. The debt crisis began with the collapse of the banking system in Iceland in 2008, then spread mainly to Portugal, Italy, Ireland, Greece and Spain in 2009. It has resulted in a loss of trust in European businesses and economies.The financial guarantees of European countries, which feared the collapse of the euro and financial contagion, and the International Monetary Fund (IMF) eventually controlled the crisis.

By the end of 2009, the peripheral eurozone member states of Greece, Spain, Ireland, Portugal, and Cyprus were unable to repay or refinance their government debt or save their beleaguered banks without third-party financial institutions ' assistance. These included the ECB, the IMF and, eventually, the European Financial Stability Facility (EFSF). Greece also revealed in 2009 that its previous government had grossly underreported its budget deficit, resulting in a breach of EU policy and spurring fears of a collapse of the euro through political and financial contagion.

The yield from Greece diverged with the need for assistance from the Eurozone by May 2010. In the following years, Greece received several bailouts from the EU and the IMF in exchange for the adoption of EU-mandated austerity measures to reduce public spending and substantial tax increases. The economic recession of the nation has begun. Together with the economic situation, these measures have caused social unrest.

A complete collapse of Italian banks is potentially a greater risk to the European economy than a collapse in Greece, Spain, or Portugal because the economy of Italy is much larger. Italy has repeatedly requested EU help, but the EU has recently introduced "bail-in" rules prohibiting countries from bailing out financial institutions with taxpayer money without first-loss investors. It was clear to Germany that the EU is not going to bend these rules to Italy.